It is now a given that we will shortly (could be as early as July) have a Financial Reform Bill. No matter what the final state of the bill is there is no question that the Mortgage Industry will be heavily impacted.

The creation of a Consumer Protection Agency is sure to mean attention will be focused on any and all current practices that might be deemed as “questionable” as they may not be fully understood by the consumer or might mean additional or hidden costs that the consumer may not understand or be aware of.

The YSP (Yield Spread Premium) will most certainly be targeted and scrutinized. In its most basic form, the YSP is extra profit created by the loan originator when a mortgage loan is closed at a higher than market rate. Let us say a mortgage broker offers a consumer a no closing cost loan with a principal of $175,000 and the YSP is 2%.

This will net the broker a $3,500 commission. The loan fees will be paid by the broker since it is sold as no closing costs. If the fees are $1,750, the broker’s net realized commission is $ 1,750.

The YSP percentage (2% in this example) is calculated between the lender and broker and results from a calculation based on the how much higher the loan interest rate is over the market rate. In our example, let us assume the mortgagee qualifies for a 6.0% rate but the final rate on the loan is 6.55%. The 55% is additional interest that will be paid to the lender over the amortization period of the mortgage. This will become considerable profit to the originator.

What the Consumer Protection Agency created by the Financial Reform Bill will most likely do is ensure that the YSP is highlighted and explained on all loan documents. The YSP is also known under various other terms such as par-plus pricing or rate participation fee.

Thus, one should look for a standardization of terminology, full disclosure on all loan documents (which isn’t necessarily required now in all states), and perhaps a limit to the % allowed between the originator and broker.

This will allow the consumer know that he is eligible for a lower rate and therefore the consumer may opt to find a broker that will forego the YSP in order to lock in a lower interest rate or the consumer may decide points and closing costs offer a better deal. After all, the lower the interest rate, the more money saved by the mortgagee.

The Senate has the House Bill now and while it is certain that the Financial Reform Bill will become law, what isn’t certain is the final structure of the bill. One thing is certain. The creation of a watch dog agency to oversee the financial markets will mean more regulation and more scrutiny of the mortgage brokering business. It is highly likely that forms will be standardized as well as terms.

The resulting changes will mean more scrutiny and protection for consumers. While this will be welcomed by the consumer, it will more than likely increase the costs to the mortgage industry and affect its profitability. Thus, the mortgage industry most be poised to examine all of its practices and be prepared to conform to the changes mandated by the new law.